What’s the Difference Between Replacement Cost and Actual Cash Value?

Home insurance is a crucial part of responsible homeownership. The right policy can make all the difference in the wake of accidents, criminal activity and some natural disasters. However, while you likely understand the importance of home insurance and how it can help you recoup losses and repair or rebuild your home, there are various nuances within policies that you must understand. One important distinction is the difference between replacement cost and actual cash value (ACV) coverage.

What Are Replacement Cost and ACV?

Home insurance policies may come in many forms, and each type can typically be customized to suit your unique needs, preferences and budget. Replacement cost coverage and ACV coverage are key components as they pertain to the structural coverage and personal possessions coverage features of your policy.

Replacement cost coverage can offer payouts for the estimated cost of rebuilding your entire home following a total loss or replacing insured belongings with similar items. This does not account for depreciation, meaning you’ll potentially receive aid for the full cost of these rebuild or replacement costs.

Meanwhile, ACV coverage does consider depreciation. After covered incidents, you can still submit a claim for aid up to your coverage limits and minus your deductible. However, if insured losses have depreciated in value, you likely won’t receive a payout capable of paying for full replacement. For example, if your roof has an estimated lifespan of 10 years and is 5 years old when destroyed, you may only receive aid for half the cost of replacing it.

Benefits of Replacement Cost and ACV Options

While replacement cost coverage can provide greater financial protection and higher payouts following covered losses, ACV coverage may help limit your premiums. If you opt for ACV coverage, you’re essentially trading savings on your rates in exchange for potentially having to pay more out of pocket for losses involving depreciated property.

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Contact Salvador Insurance Agency in Chicago, IL, today to learn more about home insurance options or compare quotes.

This blog is intended for informational and educational use only. It is not exhaustive and should not be construed as legal advice. Please contact your insurance professional for further information.